Went Bankrupt

On January 14 2009, Nortel,
a Canadian telephone
equipment maker filed for
Chapter 11 protection, one
day before deadline on a
$107M interest payment.

It’s easy to blame this
bankruptcy on the
financial crisis.

However, recessions
are always
particularly hard on
companies which
have structural
problems.

Nortel hade plenty of
structural problems.

The main reason for
the bankruptcy is the
nature of digital
technology, not the
financial crisis.

The digital revolution
has put hundreds of
industrial giants out
of business, or
created massive
problems.

Let’s take a few
examples.

When watches
became digital,
about 1000
Swiss watch
manufacturers
went out of
business in the
70s and 80s.

The manufacturers of
mechanical calculators

Polaroid

AMD

The music industry

The old
radio industry

Industries which
have become digital
ended up as red
oceans where profits
diminish and many
actors go bankrupt.

One reason for this is
the incredible pace at
which digital
technology is
developed.

Gordon Moore, one of the
founders of Intel recognized a
fascinating pattern
back in the 1960s.

Over time, the amount of transistors that could be put
on a circuit for the same price doubled every 18th month!
So for the same price you can buy something which
can store twice as much information, every 18th month!

This observation is
commonly
referred to as
Moore’s law.

The implications are enormous!
If the price/performance ratio
doubles in 18 months…
And then doubles again in 18 months…
And then doubles again in 18 months…
Then the price/performance is 8 times
better in only 4,5 years!
16 times higher in 6 years!

This is a
furious pace of
development!

And it is the
main reason
why Nortel went
bankrupt.

It is very, very
difficult to keep
up with
competitors in a
digital industry.

In the end,
Nortel just
couldn’t do it.

Let’s take a look
at how the stock
has developed.

Nortel had been
fighting the digital
war for decades.

In 1976, Nortel decided to
focus its efforts towards
digital technology.

It was the first company to
announce and deliver a
complete portfolio of digital
communications products.

The DMS line of
central office
telephone
equipment launched
in 1976 became
created explosive
growth for the
company.

The future was
indeed digital.

Nortel went
further into this
technology.

The company made
big investments in high-
speed fiberoptic systems
in 1993 and lead the
industry forward.

In the mid 1990s,
Nortel sought to
dominate the
emerging market for
public and private
networks.

This had to be done by
trying to transform a
century old telephone
company into a modern IP
technology based firm.

In the late 1990s
Nortel grew at about
100 percent annually!

In order to do so,
Nortel had to pay a
huge price for
acquiring Bay
Networks in 1998.

It also bought Alteon
Websystems for 7
billion USD. Given
that this firm had a
revenue of 200 million
USD, the price must
be regarded as huge.

As the Internet
revolution created
massive growth in
fiber optic gear,
Nortel grew rapidly.

And so did its stock.

At its height, Nortel
accounted for more
than a third of the total
valuation of all the
companies listed on
the Toronto Stock
Exchange.

Though the company
paid a huge price for
these acquisitions, it
failed miserably in
integrating them and
transforming its
business into IP
routing.

As a large and old firm,
Nortel never really
embraced the IP shift
in the marketplace.

And then the stock
market bubble burst in
2000-2001.

The recession was
particularly hard on
companies like Nortel,
which had paid
excessive prices for
firms which were never
really absorbed.

In 1999, Nortel paid $2.1
billion for Clarify Inc. This
firm was sold in 2001 for
only $200 million.

Its stock plunged
from C$124 to $0.47.

Nortels market
capitalization went from
C$ 398 billion in
September 2000 to less
than $5 billion in
August 2002

60 000 people were fired!
(In the bubble years, the company
had about 95 000 employees)

When the recession finally
went away, the problems
stayed at Nortel since it had
never really embraced the
new technology.

While telco router
companies like Cisco and
Juniper kept growing,
Nortel was left with a poor
4% market share.

As Nortel’s competitors
(Cisco, Huawei, Ericsson,
Alcatel) kept pushing the
new technology further the
firm was essentially left
behind.

In 2004, an investigation
was launched into Nortel's
financial statements. The
agency accused Nortel of
manipulating its books in
2000, 2001 and 2003.

The decline continued
even during the years of
high economic growth
2004-2007.

When the financial system
collapsed in 2008, the
situation was worsened.

In the end, there was no way
out of it, and Nortel filed for
bankruptcy in early 2009.

Summing it up:

It was Moore’s law
and the permanent
revolution of digital
technology that
killed Nortel.

This is what pushed them
into making many
expensive acquisitions that
they, because of the
existing dominant logic in
an old established company
then failed to integrate.

Just like Polaroid, the
music industry and all the
other examples
mentioned, Nortel failed to
transform its business.

Under conditions of rapid
technological development
and fierce competition, this
eventually lead to the
bankruptcy of Nortel.

Christian Sandström
www.christiansandstrom.org

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